What the US election result means for China's Tire Industry

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Will this be positive or negative for Chinese tires in the United States?

Trade

During the campaign, Trump said: “Sino-US trade deficit will reach USD505 billion this year.” He then proposed that the US should put 45% tariffs on all goods coming to the US from China.

This is likely to mean that the United States will further intensify anti-dumping and countervailing duties (“Dual Duties”) on Chinese tires. Even if that does not come to pass, the risk that it might will influence decisions by Chinese tire makers.

Exchange rates

Exchange rate fluctuations have always had a significant impact on the global tire trade and tire company results.

Trump has accused China of being a currency manipulator and said this has led to trade imbalances between the two countries. UBS Bank has advised that further appreciation of the RMB is very unlikely.

In any case, Trump’s accession is likely to lead to volatility in exchange rates, and this will increase the risks facing the tire industry.

TPP/NAFTA

Following the imposition in 2015 of Dual Duties on passenger car tires (PCR), imports from China fell from 50.42 million units in 2014 to 22.6 million sets in 2015. Meanwhile, imports to the US from Thailand grew by +67.3%; from Indonesia +44.3%, and Korea +21.4%, Vietnam exports to the US increased by over 5 times.

Behind this growth, Vietnam has seen major investments in the tire sector ahead of the Trans-Pacific Partnership (TPP). The Vietnamese government and Chinese authorities have offered extensive tax-free periods to Chinese factories that set up in Vietnam.

However, Trump said he intends to abandon the TPP. If this happens, Vietnam’s biggest advantage will be lost, and other ASEAN countries will not join the TPP, leading to more political risks. China’s enterprises will find it difficult to follow in the footsteps of Sailun, which has invested heavily in car and truck tire capacity in Vietnam.

Meanwhile, Trump has said he intends to reopen NAFTA talks, with the threat of withdrawing from NAFTA and imposing tariffs of at least 35% for imports from Mexico. Once again, this will discourage those who wish to set up factories in Mexico to serve the US market. This includes Goodyear and Michelin who have both announced large plants in Mexico in recent months.

Production

Trump has suggested that he will use trade measures to protect domestic US manufacturers. This has a side benefit that these policies may encourage US firms to close overseas factories and build more capacity in the United States. These measures include:

· Reduction in corporate income tax from 35% to 15%;

· Offer a one-time ‘on-shoring’ tax rate of 10% in order to attract businesses back to the US;

· A plan to impose a 35% import tariff on US companies that manufacture overseas and import the goods to the US. He hopes this will encourage large multinational companies to move production in Asia back to the United States.

China tire company investments

Sentury is building a tire factory in the United State. Linglong, Triangle and Zhongce are all planning their strategies for manufacture in the United States. The election of Trump is likely to accelerate these plans.

One of the fears in the US is that when China sets up factories in the US, they will steal domestic intellectual property. The experience of the tire industry in Europe and North America is that these incoming tire companies seek to recruit tire development engineers from the big-brand companies with generous salaries as a means to support the tire makers’ developing OE business in these attractive regions..

US firms may pull out of China

On November 2, Goodyear Pulandian broke ground on its fifth-phase expansion project with a new investment of USD485 million in Liaoning Province, China. This is expected to add capacity for 5 million PCR tires per year and brings Goodyear's total investment since 2009 in China to USD1600mn, including the Goodyear Asia Pacific Research and Development Centre at Pulandian.

In 2016, Cooper Kunshan plans to add capacity of about 6 million tires. On January 8 this year, Cooper made the $93 million acquisition of a 65% stake in GRT in Qingdao, the new company plans to reach 2.5 to 3 million, PCR, and the same amount of truck and bus radial (TBR) tires capacity.

Although most of these investments are aimed to serve the domestic Chinese market, so there is less incentive to re-shore the production, withdrawal of these companies would present a significant challenge to China’s tire industry.

Paris agreement on climate change

Trump said after the victory that he would cancel President Obama’s commitment to the Paris Agreement on climate change.

If the new Government makes the US more dependent on traditional energy sources, the development of electric vehicle industry will also be affected. China's electric vehicle industry is progressing rapidly, but does not have a leading company like Tesla. This change might lead to stagnation of development making recent investments in electric vehicle technology worthless.

How China looks at the US presidential election

Throughout the previous United States elections, the claims made by candidates ahead of the election have rarely been fulfilled when the candidate reaches the White House.

Trump’s comments on China introduced a lot of variables, however, at least in the eyes of most Chinese, we didn’t want Hillary Clinton to win.

The harsh US reaction to China’s activities in the South China Sea led to boycotts by the Chinese public on US products made by companies such as McDonald’s, Ford, Apple and others.

If Sino-US relations should descend further, perhaps even into a military confrontation, further boycotts on United States products in China are likely to damage the Chinese economy, because the products made by US firms are good products, although there are alternatives from Japanese companies.

If tension grows, the Chinese people will be more inclined to buy European products. Chinese mythology tends to support this move. Also, Chinese attitude toward Europe is also more inclined to equal cooperation.

In our opinion, United States is “military growth at the same time as economic expansionism”. Trump’s election marks the beginning of the United States’ transition from a world power into a regional power. China has no intention to become merely a regional power.

Meanwhile, the view, prevalent among some of the Chinese middle class, that large global corporations are changing the nature of the world from regionalist culture to global culturalism, seems to be declining. Furthermore, the choice of western democracies to select their politicians from the entertainment profession seems to be increasing.